The next 20 years of China’s engagement with African countries on financing development projects will be starkly different from the past two decades as the Chinese financing model shifts to address new dynamics in the sector.
Last year ushered in the new era of Xiao Er Mei (小而美) which means “small or beautiful”, the new approach in China’s overseas project financing which is a shift from the previous larger and more conspicuous developments. The model favors “small projects” which require below $50 million in funding, or “beautiful” ones that enjoy local communities’ support while also aligning with certain Chinese political objectives.
Xiao Er Mei came about after a proposal at the Third Belt and Road Construction Symposium in 2021 which highlighted that small or beautiful developments directly affect people. While this does not mean that big projects failed, judging the “beauty” aspect implied that beautiful projects should have- among other things- a strong environmental, social, and corporate governance (ESG) and a high community impact in host countries or a project that’s deemed politically important to China.
The essence of “small or beautiful” is having Chinese financiers, including the government, funding a small percentage of individual large-scale projects unlike in the past when several big projects were spread across many countries and regions overseas.
But even as this shift is happening, some stakeholders believe that China is still providing loans for large-scale projects as it used to over a decade ago. This shows that they do not fully understand the Chinese thinking and direction in the new development finance approach.
For a perspective on what to expect in the new era of China’s cautious financing approach, I spoke with Wei Shen, a longtime China-Africa energy scholar and the lead researcher at the International Institute of Green Finance in Beijing.
From his experience, I sought to unpack what these financing dynamics portend for future engagements between Chinese financiers and African countries interested in renewable energy projects.
This interview is lightly edited for clarity and length.
NJENGA HAKEENAH: In one of the papers you co-authored, you said that the template used to promote conventional energy projects in Africa could be used- with some changes- to scale China’s engagement with African countries to develop renewable projects. Are the Chinese players in the sector open to this? Can this same template be used in financing, especially now in the era of small or beautiful?
WEI SHEN: For some projects, yes. In many of the key countries, for example, their understanding of the Ethiopian, Kenyan, Nigerian and South African markets is there.
There are thousands of business development people in large companies like Power China, Energy China, and China Three Gorges roaming the continent. Their know-how and understanding of the African electricity sector can be used to promote conventional energy projects there. And I don’t think that in the long run, China Exim Bank or the China Development Bank will just sit there and watch the market slip away. But they need to do something and their previous practices can be helpful. They can just directly copy and paste their previous success obviously but they need to be more flexible and more innovative. My understanding is that you can’t expect people will invest in Africa just like they invest in the Middle East. We need to find a way to invest in these high-risk countries.
I know everybody is talking about the beautiful IPPs or PPPs and so on. But in the end, it’s how likely it is to develop proper IPPs without reforming the electricity sectors as we have in most African countries. It takes time. You need reforms both in African countries and in China as well to develop a new model that has to be created based on historical achievements.
NJENGA: What are the hindrances Chinese investors and financiers face at home when seeking opportunities in renewables in various African countries? How can these challenges be addressed?
WEI: While there are some challenges that are non-Chinese, the common hindrance is the reality that large infrastructure projects led by government-to-government (G2G) agreements are coming to an end. This is not just in renewables or even energy infrastructure but also roads, railways and all others.
These projects are coming to an end because the need for them is shrinking hence demand is decreasing. Compared to what was needed 20 years or even 10 years ago when everyone just won new roles in railways (etc.), things are not the same anymore. I’m not saying that there will be no projects but in the end, they will be fewer than it has been.
If you look at the specific demands of many African countries, they are now more focused on production-related activities rather than fancy highways that lead to nowhere. As things change, the mentality has changed. Most importantly, many governments cannot afford the G2G model anymore.
NJENGA: What then does decreased demand mean for host countries and the financiers back in China?
WEI: If the situation is changing so dramatically from demand and obviously from supply, people see these trends and they become more cautious. And this is not just about energy projects.
Renewables which are now the major thing are different from conventional projects in that they are highly sophisticated and capital-intensive. While this is not in terms of large amounts of investment, it means that they are Wall Street and London’s favorite babies now. Problems emerge when capitals (of the world) are chasing around these projects and thus they follow a very sophisticated financial model that is very different from the G2G model. Since the capitalists want to cash in and cash out very quickly, they use all their leverage and very advanced financial tools to package all these projects, particularly in the Middle East and in the Central Asian markets. Due to this, some Southeast Asian and African markets are not suitable.
NJENGA: What are the unique challenges when it comes to Chinese finances and capital in this new dispensation where competition has gone up a notch?
WEI: China is not good at this (finance) game at all. Our banks are in a very preliminary stage of understanding this new trend. And if you think about the big policy banks, they’re big and when they’re trying to provide loans, it’s cheap. It’s incomparable in terms of the size and in terms of their appetite. But when you talk about flexibility, innovative capacity and quick decisions, they can’t compete with Wall Street and London and that’s why they’re left behind. And even if they want to work with these Western organizations, they can’t. They’re not on the same page at all and that’s why the Chinese are left behind.
The Chinese are very good technological suppliers. If you talk about the quality of panels and the quality of wind turbines, no problem at all. They are very good construction workers. They’re hardworking people. They’re working in almost all conditions. It doesn’t matter how hard the situation is. Even in the middle of the desert, they can build things up. Best builders in the world. But they’re not good financiers.
NJENGA: In consideration of China’s financial muscle, does it mean that they have the money and not the know-how to invest this money?
WEI: There’s a misconception that they are doing something different from the West. That they have different ways of risk evaluation, risk management or portfolio management. And probably they learn the trick and that the financial markets are not that different. Back to the fundamentals though, high risk is a high risk, particularly at a time when the dollar is still dominating the same. And we’re subject to the turbulence of interest rates in a difficult time like this. They have limitations and are understanding this now. I’m not saying that the finances are gone but the funders are more cautious about lending.
NJENGA: The BRICS event was a huge show. Do you think this will probably bring some impetus to project financing and other related activities on the continent?
WEI: Chinese companies are actively seeking new opportunities for sure but the financiers are a little bit more cautious and less innovative. They know they are left behind and trying to find a way but this takes time. Chinese companies are still on the ground desperately seeking new opportunities but the question is where these projects are and if they are bankable.
With the financiers and investors left behind, they are looking only to a handful of markets or regions at the moment. The entrepreneurs and investors are not looking at Africa and that’s the problem at the moment. They’re looking at Vietnam, they’re looking at Kazakhstan, Uzbekistan and Saudi Arabia.
Understandably, how can we change their perceptions to say we still have valuable assets (in Africa) to be captured or to be realized? It’s going to be a hard job to attract their attention.
NJENGA: Now that you’ve mentioned the kind of shift towards where they are focusing, do you think it’s because maybe the return on investment is faster in Vietnam or in other Asian countries, Saudi Arabia, etc, than it is in Africa?
WEI: Well, Vietnam is close. Proximity matters. Also, safety in terms of transportation costs, in terms of understanding the market and actors, and in terms of value chains and logistics.
We see a lot of potential in African markets, but when talking about achievable or tangible potentials, these are capacities that can be developed. The potential is limited or it is not convincing enough. In comparison with Vietnam, people just believe it’s going to happen. When they have a five-year plan, people just believe it’s going to happen. When Zimbabwe has a five-year plan, nobody believes it’s going to happen.
When Ethiopia has a five-year plan, it’s a big plan and it’s a very ambitious plan. Nobody believes it’s going to happen. So it is confidence in the policy targets, confidence in the market potential and achievable market potential.
For the Chinese state-owned enterprises, their appetite for investment is already very small. And they are not EPC contractors. For the small appetite, they would like to invest in a nearby, neighboring country. Understandably, it allows for financing a project in Cambodia, for example, even though in comparison the risk in Kenya is much less.
Wei Shen is the lead researcher at the International Institute of Green Finance in Beijing.